Everyone's Flagging One Warning From Janet Yellen's Testimony On The Economy

For the most part, she's been sticking to the Fed's script of noting problems in the labor market and reiterating that rates would be low for a long time. But everyone's flagging what she's said about housing in her prepared remarks.

One cautionary note, though, is that readings on housing activity—a sector that has been recovering since 2011—have remained disappointing so far this year and will bear watching ...

... the recent flattening out in housing activity could prove more protracted than currently expected rather than resuming its earlier pace of recovery ...

TD Securities' Millan Mulraine characterized this as "an important departure from the past upbeat tone on the economic outlook."

Lately, various housing-market metrics such as existing-home sales, new-home sales, and mortgage applications have all been flagging. Last week, we learned that the U.S. homeownership rate was at a 19-year low, and some experts think it'll never come back.

"[T]he Fed is beginning to recognize that the biggest drop in affordability in more than 30 years is a serious drag on activity," said Pantheon Macroeconomics' Ian Shepherdson.

It's Not All Bad

The bad stuff going on in the housing market is really only just half the story.

In a new blog post on Calculated Risk, economist Bill McBride highlights nine things going right in the housing market. Among them he notes sales of distressed homes are declining, mortgage delinquenices are down sharply, mortgage credit is so tight it can only get looser, and the percent of homeowners in negative equity is tumbling.

"The fading of the housing recovery is mainly due to two factors; the effects of the severe weather and last year’s rise in mortgage rates," noted Capital Economics' Paul Dales. "With the weather returning to normal and mortgage rates having fallen back a bit, the housing recovery will come back to life before long."

Everyone Agrees This Past Winter Was Terrible

Before she warned about housing, Yellen blamed the harsh winter weather for GDP in the first quarter essentially grinding to a halt.

"With the harsh winter behind us, many recent indicators suggest that a rebound in spending and production is already under way, putting the overall economy on track for solid growth in the current quarter," Yellen said.

As such, her comments on housing are definitely worth flagging because she seems to have doubts that warm weather will put the market back on track.

"It is notable that the pending home sales index rebounded sharply in March and, while mortgage applications remain weak, the value of actual mortgage lending has started to rebound in recent weeks," said Capital Economics' Paul Ashworth. "Accordingly, we don't share Yellen's pessimism and expect a rebound in residential investment starting in the current quarter."

For those watching interest rates, it may be too early to conclude that Yellen is about to change course of monetary policy.

"Although this language is likely viewed as dovish, we do not believe that it suggests a later start to the Fed's rate hike cycle nor a slower pace to the speed of that cycle than is currently evident in the FOMC's forecasts provided in March," said UBS's Drew Matus.

For now, we'll all just have to hope that Yellen's cautious tone is just that.

See Also:

One Of The Best Housing Pundits Has A Great Reality Check On What's Really Going OnNo One Can Agree On Whether There's Still Slack In The Jobs MarketFED CONTINUES TO TAPER

SEE ALSO: Here's Jeff Gundlach's Big Presentation On Why Homeownership Is Overrated And Why He's Short The Homebuilders